I keep returning to this subject because a level of non-comprehension persists. It is not pedantry; the lack of clarity in this area will, unless remedied, inexorably lead to the collapse of Western Civilization.
It is imperative that what money is be widely known and understood. Money is not just whatever is being used as the medium of exchange. If that were true, then paper currencies, irredeemable paper, fiat, call it what you will, would be just fine. They are not fine. Do not for one moment believe that the collapse of fiat will see Gold automatically re-emerge. Central banks will try to foist some other make-believe money onto a gullible public – a New Dollar with some zeros crossed off, a CB controlled crypto?
Before going any further, some definitions need to be laid down. Prior to Dawn of Gold, these core marketplace concepts had not been defined. That omission had been a good part of the problem.
Good An exchangeable, quantifiable value
Trade Good An easily exchangeable good used to transfer value into the future
Medium of Exchange Another name for a trade good
Most Marketable Good The best trade good
Paper Money A token trade good given momentum by legal tender laws.
Gold A store of stable value
Money A known weight and fineness (purity) of Gold
The Marketplace in Action
If Bill owns a bike and wants to swap it for a horse, and John owns a horse and wants to swap it for a bike, then a deal is easy. They barter. Each swaps the good that they don’t want for the good that they do want. This type of exchange has less friction than any other and is easily understood by everybody. Its limitation is that such a coincidence of means and wants is too unusual to make it practical for widespread trade.
Medium of Exchange
However, if John wants Bill’s bike, but doesn’t have a horse, he may offer a medium of exchange for the bike. That is, a good that is not the good that is wanted, but one that can be easily swapped for another good – i.e. something Bill can use to exchange for a horse.
The requirements of a medium of exchange are that the good is desirable over time and space and that there is an expectation that it will hold its value long enough to be useful.
Many goods have been used as a medium of exchange, including cows, goats, salt, cigarettes, dried meat and furs. The most acceptable medium of exchange is known as ‘the most marketable good’.
The ‘most marketable good’ and a ‘medium of exchange’ used to be known as ‘trade goods’. Until that is, economists got hold of the concept and made it almost unintelligible.
“An economist is a man who states the obvious in terms of the incomprehensible.” Alfred A. Knopf
Here is where we get to the crux of the matter. Being a ‘medium of exchange’ or, the even more nebulous, ‘most marketable good’, does not make something money. That is wrong at every level of resolution, including that it provides support for the argument that fiat paper is real money. It is incontestable that in the 21st century, fiat paper is the most marketable good. If today, you offered the average Joe Blow the choice of an equal value in either dollars, goats, cows, salt, Gold, silver or furs, the overwhelming majority would choose dollars.
A trade good is just that, a good used to trade for other goods. Just about anything can act as a trade good. Money is far more exclusive and the full expression of the concept is more demanding.
Money has a different definition and a different function to a medium of exchange. Money’s job is not dependent upon being used in the exchange of goods, though it can, and occasionally did, under the Gold standard, perform that role.
Firstly, and imperative to the understanding of money, it is NOT a good – not a trade good, not a ‘most marketable good’, not any sort of a good.
Implicit in the definition of a good is that it has subjective value. Each person is an individual who values a good differently – higher or lower or not at all. The objective value of Gold is used to quantify a person’s perception of the value of the good. Were Gold not an objective value, then it could not be used to quantify a good’s value. Even when the erratic fiat is performing this quantifying role, still it is treated as an objective measure. The market could not work without some objective way of quantifying the perception of value of a good.
Every measure, whether it be the kilo bar in Paris, or the one metre ruler or the one pint jug has to be regarded as objective. The area of money and value is no different, can be no different. Money is an objective value. Ipso facto, money is not a good.
That is why money is unique. The action of refining Gold to a stated purity and stamping the coin or bar with a weight elevates the Gold that is a good into a Gold that is money. It is a profound transmogrification that changed the course of history in a way that no medium of exchange ever could.
If money could be reduced to just being the ‘most marketable good’, then just about anything could be foisted off onto the public as money. That is what governments have done and it has a history of turning out badly. Not only is money not a good, it is not even very marketable as its value is too high. That is why silver acts as Gold’s surrogate in the marketplace. History’s ‘most marketable good’ was silver, but a century of paper money circulation has warped perceptions across the monetary universe.
But nothing can change the fact that only a known weight and fineness of Gold can be money. Gold, though a store of stable value, is still a good, not money. Monetary status is only achieved at the point where it becomes a known weight and fineness of Gold. That can be as a coin, a bar or in any other form, as long as it is a known weight and fineness. Now it is not only a store of stable value, but it has become a stable known value. And that is what made the difference – all the difference in the world.
Money’s primary function is to transfer a stable and known value from one point in time and space to any future point in time and space. It was this star quality function, the real use and the real importance of money, that created the incentive to produce surplus goods. Lacking the means of stably storing profit, why bother making a profit?
It was the stock-to-flow ratio that gave Gold its stability of value. It was the extraordinary transmogrification of Gold into money by the process of making it a known weight and fineness that gave the world the accumulations of capital necessary for the creation of Western Civilization.
Those early Gold refiners were history’s true alchemists. They took Gold and turned it into money. In so doing, they put in place the foundation stone of the modern world.